Final regulations issued for UBTI ‘siloing’ rules


The IRS released final regulations (TD 9933) on Nov. 19 providing guidance on calculating unrelated business income tax (UBIT) for tax-exempt organizations that conduct one or more unrelated trades or businesses under Section 512(a)(6). The final regulations generally adopt proposed regulations issued in April but make some key clarifications.

The Tax Cuts and Jobs Act (TCJA) added Section 512(a)(6) to provide that a tax-exempt organization with more than one unrelated trade or business must calculate UBTI separately for each trade or business. However, it offered no definitional guidance on what is considered a “separate trade or business” nor did it advise taxpayers how to classify its investment activities. The IRS attempted to remedy this through Notice 2018-67 and the previously issued proposed regulations. For more details on the proposed regulations, see our prior coverage.

Key aspects of the final regulations are highlighted below. Tax-exempt organizations should take particular note of changes relating to qualified partnership interest (QPI) investments and the use of North American Industry Classification System (NAICS) codes. Although the final regulations became effective on Dec. 2, 2020, exempt organizations may apply them early for tax years beginning on or after Jan. 1, 2018.




NAICS codes


The final regulations retain the two-digit NAICS codes to identify each distinct unrelated trade or business and recommend that exempt organizations rely on the descriptions in the current NAICS manual when determining the appropriate coding for its business lines. In addition, the final regulations provide important clarifications, including:

  • Removing restrictions in the proposed regulations that limited a tax-exempt organization’s ability to change its two-digit NAICS codes. Changes are permitted so long as they are reported in the taxable year they are made in accordance with the relevant forms and instructions (to be issued after the final regulations are effective).
  • Requiring organizations operating the same business activity at multiple geographical locations to be aggregated even if separate books and records are maintained.
  • Allowing organizations conducting online and in-store sales to aggregate those activities so long as the goods sold online are the same as those sold in-store.




Investment activities and QPI


The final regulations generally adopt the proposed regulations by continuing to treat a tax-exempt organization’s investment activities subject to UBIT as a separate trade or business for purposes of Section 512(a)(6). As such, a QPI may be grouped with other investment-type activities, such as qualifying S corporation interests, and debt-financed income, into a single investment bucket. Only those partnership interests that constitute non-QPIs will be required to be siloed.

When determining which investments constitute a QPI, the final regulations modify the “control” test in subtle ways. First, the “control test” has been renamed the “participation test” to better reflect that the test focuses on the level of participation the tax-exempt organization exercises in the investment. A QPI meets the participation test if the tax-exempt organization:

  • Directly holds no more than 20% of the capital interest in the partnership
  • Does not significantly participate in the partnership

The final regulations look to whether the exempt organization has “significant participation” using the same three factors that were previously outlined in the proposed regulations under the control test. The investment cannot be classified as a QPI if any of the following are met:

  • The exempt organization, by itself, can require the partnership to perform, (or prevent it from performing), any act that significantly affects the operations of the partnership
  • The exempt organization’s officers, directors, trustees or employees have rights to participate in the management of the partnership or have rights to conduct the partnership’s business at any time
  • The exempt organization, by itself, has the power to appoint or remove any of the partnership’s officers or employees or a majority of directors

The final regulations maintain and expand the “look-through rule” from the proposed regulations, by allowing tax-exempt organization partners to consider the business activities of a lower-tier partnership (LTP) for the purposes of determining whether the interest would be considered a QPI. The final regulations adopt the proposed regulations’ de minimis test, which allows an LTP to qualify as QPI if the interest in the LTP is less than 2%, even if the tax-exempt organization partner’s capital interest in the upper-tier partnership (UTP) was greater than 20%. Thus, for purposes of the look-through rule, the participation test will apply tier-by-tier to the exempt organization’s LTP interests.






The final regulations did not change the order in which pre-2018 and post-2017 net operating losses (NOLs) are utilized. The proposed regulations stated that tax-exempt organizations should first apply its pre-2018 NOLs (those generated prior to the “silo” requirements) and then apply the post-2017 NOLs (those generated after the “silo” requirements). This methodology allows organizations to maximize the usage of pre-2018 NOLS, which are not limited, over post-2017 NOLs, which are generally limited to 80% of taxable income.

Where a particular “silo” is terminated, sold or exchanged, any remaining NOLs generated by such unrelated trades or businesses are suspended until either the activity resumes or the tax-exempt organization conducts a new unrelated trade or business employing the same two-digit NAICS code. The final regulations do not address changes made to the NOL deduction by the CARES Act.




Public support test


The final regulations permit an exempt organization with more than one unrelated trade or business to determine its public support either by calculating UBTI under the silo rules or in the aggregate. The second option is intended to prevent an exempt organization from suffering an adverse impact to its public support test from application of the silo rules.




Next steps


For tax-exempt organizations looking for guidance to calculate unrelated business income, the final regulations offer key clarifications to the previously issued proposed regulations. Notably, tax-exempt organizations should familiarize themselves with the NAICS two-digit codes to ensure a consistent application of these codes throughout the years. While the ability to change those codes in future years is a welcome modification to the proposed regulations, it remains to be seen whether doing so will invite further IRS scrutiny of the underlying trades or businesses to ensure that the organization isn’t making those changes simply to effectuate a favorable tax outcome.

Likewise, clarifying guidance on QPI investments should simplify tax-reporting for exempt organizations holding significant portfolios of limited partnership investments. The “look-through-rule” removes much of the administrative burden of tracking lower-tiered investments, while the ability to aggregate QPI investments with other investment activities (such as debt-financing activities), enables tax-exempt organizations to limit their potential count of different UBIT buckets. The re-branding of the control test into the participation test should provide exempt organizations with clearer guidance on how to segregate its non-QPI investments.

As organizations await further revisions to the Form 990-T and its instructions, they should revisit their unrelated business activities to ensure adherence to the final regulations and plan accordingly for reporting these activities on the new Form 990-T. With the imminent approach of the e-filing mandate for Forms 990-T, and the subsequent publication of such returns on GuideStar and ProPublica, exempt organizations should be prepared to have these non-mission related activities more closely scrutinized by both the IRS and the public.

To learn more visit






Tax professional standards statement

This content supports Grant Thornton LLP’s marketing of professional services and is not written tax advice directed at the particular facts and circumstances of any person. If you are interested in the topics presented herein, we encourage you to contact us or an independent tax professional to discuss their potential application to your particular situation. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein. To the extent this content may be considered to contain written tax advice, any written advice contained in, forwarded with or attached to this content is not intended by Grant Thornton LLP to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.

The information contained herein is general in nature and is based on authorities that are subject to change. It is not, and should not be construed as, accounting, legal or tax advice provided by Grant Thornton LLP to the reader. This material may not be applicable to, or suitable for, the reader’s specific circumstances or needs and may require consideration of tax and nontax factors not described herein. Contact Grant Thornton LLP or other tax professionals prior to taking any action based upon this information. Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein; Grant Thornton LLP assumes no obligation to inform the reader of any such changes. All references to “Section,” “Sec.,” or “§” refer to the Internal Revenue Code of 1986, as amended.


More alerts